Real Estate
Property recovery leads economy
We upgrade the China property sector from Neutral to Overweight due to the
recovery in market sentiment and transaction volume. Property prices still might
have 5-10% downside risk, but we think improving visibility and the reduced risk
of bankruptcies have made the valuations of some stocks more attractive.
Chart 1 : Monthly transaction volumes of 8 major cities (Index Base: Jan 07 = 100)
20
40
60
80
100
120
140
160
180
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 *Mar-09
Peak in Mid 2007
First Rebound in 08
Second Rebound in 08
* Sales momentum
consistent in March
8 Major cities
Source : Soufun
Sustainable improvement in sentiment and transaction volume
Our recent site visits indicated that volume increases seen over the past six weeks seem
sustainable. The lack of new stimulus measures suggests the improvement in sentiment has
more to do with underlying demand than a knee-jerk reaction to news. We think rational
pricing and supply of small units should continue to attract owner/occupier interest and serve
as a precursor to a property market bottom in mid-2009 before a recovery in 4Q09.
Rebound in property market leading, but not causing, a recovery in the economy
Premier Wen Jiabo’s repeated plea of preserving confidence and his theory that a “warm
heart” leads to a “warm economy” may be realised with the help of Chinese home buyers
putting more trust in their leaders and being less worried about an economic downturn than
their counterparts in developed countries. A property market recovery hinges on economic
recovery in 2H09. We expect, in line with our economists, 5% GDP growth for 2009.
Medium-term growth looks attractive
Long-term growth of China’s property market will be supported by rising GDP, per capita
income, urbanisation and suburbanisation. We believe the medium-term prospects for
developers are attractive, as we expect a return to a more normal operating environment in
2010, a sufficiently large and cheap land bank, and a possible shortage of supply in 1H10.
Time to switch to higher-beta names
We adjust our DCF/NAV-based target prices on the developers by -21-161% on our reduced
forward beta and higher medium-term growth assumptions, but make no changes to our
2008-10 earnings forecasts. Our top picks are CRLN among the blue chips, SINO among the
mid-cap names and HOPS among the ‘cheap but risky’ names.
Contents
Reasons for optimism 3
Through our site visits in major cities over the last three months, we have noticed a
trend of stabilisation characterised by a rebound in transaction volumes and slowing
price declines (confirmed by the latest statistics and supported by official
comments).
Refocusing on medium-term growth 10
The long-term growth of China’s property market appears promising due to rising
GDP, higher per capita income, urbanisation, suburbanisation, infrastructure
improvement and product enhancements. We find the medium-term prospects
attractive as well.
From distressed scenario to recovery path 12
We have stayed defensive and recommended holding blue-chip for liquidity and
relative stability. As we appear to draw closer to a recovery, high-beta stocks with
sufficiently large and cheap land banks to support earnings growth may come back
in favour.
Risks of a false start 14
The warming in property market sentiment could cool quickly if economic figures
show rapid deterioration from current levels. If people lose confidence in their
leaders, interest in real estate could be weakened and purchase decisions delayed.
Summary of site visits 15
Valuation 18
We base our target prices on a three-stage DCF and use NAV as a secondary
reference. The implied 2009 PEs of our covered companies range from 3 to 15 with
an implied 86% discount to 57% premium to our end-2009 NAV estimates.
18
Company profiles 21
Agile Property 22
CC Land Holdings 30
China Overseas 38
China Resources Land 47
Country Garden Holdings 55
Franshion Properties 63
Greentown China 71
Guangzhou R&F 79
Hopson Development 87
KWG Property Holding 95
Shanghai Forte Land 103
Shimao Property 111
Shui On Land 119
Sino-Ocean Land 127
SOHO China 135